Penske Outdoes Expectations

Penske Automotive (PAG - Analyst Report) posted a net income of $30.9 million or 34 cents per share from continuing operations in the third quarter. With this, the Michigan-based second leading automotive retailer in the U.S. exceeded the Zacks Consensus Estimate of 27 cents per share. When compared to the year ago level, net income reflects a rise of 16% from $26.6 million or 21% from 28 cents per share in the third quarter of last year.

Total revenue dipped 13% to $2.59 billion. New Vehicle witnessed a steeper 14% decline in revenue to $1.34 billion compared to Used Vehicle (5% to $673 million). Total retail revenues slipped 10.4%, driven by weakness in the U.S. market. Same-store retail revenues fell 12.4% to $2.34 million. Excluding exchange rate fluctuations, total same-store retail revenues declined 8%, including 3.5% for service and parts revenues.

Penske wholesaled 3,401 units of smart USA vehicles, a decline from 6,683 units in the prior-year quarter. To fight the difficult new vehicle sales environment in the U.S., smart USA introduced new finance and marketing campaigns in October. For the year, smart USA anticipates to wholesale as many as 15,700 units.

Penske had cash and cash equivalents of $29.5 million as on Sept. 30, 2009. Long-term debt amounted to $971 million as on that date. The long-term debt-to-capitalization ratio stood at 51%.

Penske Automotive Group operates 310 retail automotive franchises, representing 40 different brands and 25 collision repair centers. It has 160 franchises in 17 states and Puerto Rico and 150 franchises located outside the U.S., primarily in the U.K.

Despite enjoying a prominent position in the automotive retail market, Penske is still burdened with its highly leveraged balance sheet. This has led us to maintain our Neutral recommendation of the stock.